I’m in my early 30s and live in London. I have £100k in savings, and earn £95k. I’ve just been saving - I’ve never tried any ISAs, stocks etc. before. I’m not sure about buying property at the moment. Instinct is telling me to keep 50k in a safe investment, 30k in a medium risk investment, 10k in higher risk, and keep 10k for emergencies. I’m making nothing keeping the cash in the bank! Any suggestions as to the types of products to use would be much appreciated!
Thanks for your questions, and I think your suggested allocation is not a bad start.
When will you need access to capital?
When deciding what to do with the savings you’ve built to date, it’s important to consider when you might require access to this capital. I find a simple way to work through this, is to allocate your savings to meet your short, medium and long term needs; I like to think of this as your ‘3 pots’.
Your short term pot is any cash you expect to require access to, over the next couple of years.
Given the savings you have built, I’m assuming your income exceeds expenditure, and there is no need to allocate any savings to meet your day-to-day living costs. Within your short term pot you should make sure you maintain an emergency fund (as you mentioned!), typically I would recommend this be between 3-6 months of expenditure. On top-of this, you should make sure you have sufficient cash to meet any known capital expenditure over the next couple of years.
Short term pot
Your short term pot should be instant access cash, to make sure the money is available when you need it. As you have mentioned, you are unlikely to earn much interest on instant access cash at the moment, and inflation will ultimately erode the purchasing power of your short term savings. However, given the expected time frames, this is a risk I would accept over the short term, rather than risking a significant drop in the capital value with higher risk options. Any cash over and above your short term pot should be allocated to your medium and long term ‘pots’.
Medium term pot
Your medium term ‘pot’ is typically any cash you expect to require over the next 3-5 years. Given what you have said, it may be that a deposit for a property purchase falls into this bracket. Where possible your medium term ‘pot’ should aim to keep pace with inflation (maintaining the real value of your savings) without putting the capital value at risk; in the current low interest rate environment this is difficult to find. It may be that you consider fixed term deposits which offer a greater return than instant access cash, accepting that there is likely to still be an element of inflation risk over this period.
Long term pot
Anything over and above your medium term need, should be allocated to your long term ‘pot’ with the aim to achieve a return greater than inflation, increasing the real value of your money, over the longer term. You should take a 5-10+ year view with these assets, so to maximise the potential long term returns, your capital will be at risk. Typically investments within the long term ‘pot’ would be a globally diversified, low cost, equity portfolio which in times of temporary market declines, could see a significant fall in the capital value.
By having the buffer of your short and medium term ‘pots’, you are able to accept a greater level of risk within your long term ‘pot’, knowing that you do not expect to access this over the next 5 years. This should avoid the need to draw on those assets within your long term ‘pot’ in times of temporary market decline when the capital value could be less than your initial investment. Over the longer term, the evidence shows that the additional risk should be rewarded, giving the greater potential for long term returns. However, past performance is not a guide to future performance.
Given the cash you have to date, and that a property purchase could be likely at some point, it may be that the majority of the cash over an emergency fund, is earmarked for a house deposit in your short or medium term ‘pots’ (especially if you are hoping to buy a property in London).
Thinking longer term
If your current savings give you an adequate buffer for this, you may then decide to allocate future savings to your long term ‘pot’.
To maximise the tax efficiency of your long term savings, you could consider a Stocks and Shares ISA and a personal pension (or your existing work place pension assuming you are employed).
Given what you have said about a potential property purchase, you might also consider a Lifetime ISA (LISA), to benefit from a 25% government bonus on your contributions (you can contribute up to £4,000 each year).
Be sure to familiarise yourself with the restrictions on accessing savings within both a pension and a LISA, and bear in mind that tax reliefs depend on an individual’s circumstances, and may be subject to change in the future.
I hope this helps and good luck!